Could Renouncing US Citizenship Become Business as Usual?

This is a guest post/syndication from Dan Andrews of tropicalmba.com - an entrepreneur who I have a lot of respect for and have a learned a ton from over the last few years from via his blog/podcasts.

Last week a huge media-storm erupted as it became public knowledge that Facebook co-founder Eduardo Saverin had filed to give up his US citizenship.

When I heard the news I didn’t even think twice about it. I guess I’m in a bit of an entrepreneurial bubble. My friends and I talk about citizenship, banking, and taxation on a daily basis. I do understand why these issues inspire heated debates, but for many of us who have lived abroad for long periods of time, issues around foreign residency and citizenship are matters of fact.

There’s a lot of great things about being an American who lives abroad– those are pretty well documented. There are also a lot of downsides.

Here’s a few:

1. Americans are taxed on their worldwide income. “The United States is the only major country which taxes based on citizenship rather than residency.” [source]
2. Americans need to tell the IRS about any bank account or company they have any control over. It might sound like no big deal, but add a few small investments to your portfolio and all of a sudden you’ve got a big headache on your hands. What makes it even worse is that…
3. The US tax code is terribly complex, confusing, and expensive to comply with. This is the case even for highly experienced professionals in the game for decades.
4. Many banks and overseas professionals won’t deal with Americans. It’s looking like this is about to get a lot worse. “The foreign banks also must provide an annual report of the account balance, gross receipts and gross withdrawals of the U.S. account holders.” [Source: MSN]

It’s no wonder that many long term US expats would prefer to take on another citizenship. So far, the US hasn’t looked kindly on individuals who have made such a decision. Recently, Senators Casey and Schumer have gone as far to suggest that the penalty for citizens leaving the USA for tax reasons would be a lifetime ban from re-entering.

It’s already pretty bad, check out these current policies for US citizens who decide to renounce:

In 1996, the U.S. changed its immigration law to include a provision to “name and shame” renunciants… In 2008, Congress enacted… an “exit tax” … effective June 2008, U.S. citizens who renounce their citizenship are subject under certain circumstances to an expatriation tax, which is meant to extract from the expatriate taxes that would have been paid had he remained a citizen. [source]

A lot of blogs bemoan the “big brother” tendencies of the American government.

I see their point, but I also see a lot of the US government’s legislation efforts as part of a power dialectic. The government is responding to the unprecedented level of freedoms it’s citizens possess.

In the 1980′s, you couldn’t just jump on a plane and open up a few offshore companies for your small internet business. The US never really had to compete with Hong Kong before for small business entrepreneurs.

The decision to renounce American citizenship will ultimately come down to business as usual.

Remember way back in the early 2000′s when you and your family members would argue about whether or not companies should send their manufacturing to China? (oh wait, that was me!) 5 years later when they went to Best Buy to buy a cheap plasma screen, they probably didn’t care at all where it was made. And last Christmas when they went to get their wife a new smartphone, they didn’t think for a moment where it was manufactured.

It’ll likely go the same way with citizenships. Who can do it better and cheaper?

If American legislators continue to be a royal pain in the ass in the coming decades, and entrepreneurs continue to gain power and agency (and it’s the type of power they can successfully maintain aboard), they will likely continue to renounce in record numbers.

Why not let people leave peacefully and invite the best and the brightest who really want to contribute?

Schumer and Casey want to ban guys like Eduardo– a guy who helped build perhaps the single most important American company in the past 5 years– from ever returning to the USA. (ok, maybe he didn’t build it, it’s been a while since I’ve seen the movie).

Here’s something I know from my experience of living abroad– being an American citizen and passport holder is one of the most desirable distinctions in the world. For every one Eduardo there’s 100′s of thousands of intelligent, ambitious entrepreneurs the world over who would kill to do the same thing he did– build the next great world-changing company on American soil.

We should get more aggressive about opening our doors to them. And if after they have a billion dollar IPO, they decide to go elsewhere, let’s try not to be jerks about it.

Cheers,

Dan